Interpreting Returns on a Leveraged Long-Short Portfolio

Summary

The document presents a long-short portfolio with a small long position, a much larger short position, and cash held alongside the positions. Its reported portfolio contribution is sharply negative even though the portfolio’s net market value is positive. This illustrates that net market value alone does not show the risk or return behavior of a portfolio with large gross exposure.

The author asks how to calculate returns over multiple periods when one period’s return is below negative one hundred percent, and whether multiplying subperiod returns remains appropriate. The document provides no answer or calculation method, so it does not resolve whether the figures use a consistent return denominator or how later positive returns should be treated. It is best read as a question about return measurement and compounding in leveraged portfolios, rather than as guidance on a defined strategy.

Key ideas

• A long-short portfolio can have positive net market value while showing a very large negative return contribution.
• The displayed positions imply gross exposure that is much larger than net portfolio value.
• The author asks whether subperiod compounding remains meaningful when a reported period return is below negative one hundred percent.
• The document does not provide a resolution or establish a multi-period return method.

Tags

# Long/Short portfolio return


# Long/Short portfolio return












Suppose I have a Po with one long, one short positions and some cash (to balance the short + 50% margin) as shown below:

```
        Begin$     Weight%    Returns %   Port Contrib %

ABC        6675  2.883182515     -0.29963        -0.008638749

CBA      -449680   -194.233635     70.31751      -136.5802588
Cash      674520    291.3504525    0.00011     0.000319288

Total     231515      100                         -136.5885783%
```

Note that the return of my portfolio is negative (-136.58) and my market value is positive. My question is for a case like this how can I calculate the return over multiple periods, especially if for the rest of the periods the returns are positive? I tend to believe that the usual solution, which is compounding of all sub period portfolio returns may not work anymore?

Thanks

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.